Small Business activity reaches two year high

Business activity for UK small and medium sized businesses reached its highest level for two years and employment levels rose as businesses take on temporary labour to cover the summer season, according to the PKF SME Index, a quarterly survey of 800 SMEs in the construction, manufacturing and service sectors.

Business output rose to 55.5 from 55.3 in Q1 and new business orders remained buoyant at 54.8 (where marks above 50 indicate expansion and marks below 50 indicate contraction). The construction sector signalled the sharpest rate of growth at 56.4 and manufacturing has now recorded four consecutive quarters of rising business activity following a shaky start to 2005. Anecdotal evidence from respondents indicates a number of factors including increased export activity, a 'buoyant market', and the summer season.

The growth in new business orders also continued during the quarter. For the manufacturing sector, the main drivers are seasonal and increased demand while the service sector started to reap the rewards of their New Year sales and marketing campaigns. However, service companies struggling to win new business cited the World Cup as a reason for an unseasonally quiet June.

Employment levels were at their highest for two years at 52.8 with the manufacturing sector recording their first growth (53.7) since 2004 Q3. Manufacturing companies are recruiting both to meet full order books and to cover the holiday period with temporary and short contract staff. There is little evidence of redundancies within the sector with any reduction in staffing levels resulting from natural wastage.

The bad news is that business costs rose at their fastest rate since 2004 Q4 at 64.0. Manufacturing companies cited ever-rising prices for steel, copper and oil while fuel and labour costs were the main contributors to rising service sector input costs. All UK SMEs are making a greater effort to pass increased costs to their customers with varying degrees of success. Manufacturers are passing on raw material, fuel and energy surcharges while service providers are increasing their rates, charging higher summer prices, and reducing their discounting.

Wales & the South West was the best performing region in the UK. Business activity accelerated to a two-year high at 56.8 while London & the South East lagged in last place at 53.8. For the fourth consecutive quarter, all six UK regions recorded increased levels of new business with the East topping the league at 56.5.

PKF partner for growing business, Stuart Barnsdall, commenting on this quarter's survey results said: "Despite the apparent continuing robust growth in output and new business activity revealed in this quarter's survey, it is clear that the Bank of England takes a more sceptical view. Mervyn King, the governor of the Bank of England, has already expressed concern about rising global inflation and fears that "a bumpier stretch of road" lies ahead for the UK economy .

"The hefty and ever-increasing costs of raw materials are forcing businesses to put up their prices. These inflationary pressures will make it even harder for UK industry to compete in the global marketplace."